From a banker's perspective, the first part of the requirement is all too easy to fill; the second part is the hard part. Bankers must compete to find and assess the good borrowers, and that puts bankers into the information business: The profitable lender is the one who best understands the businesses that borrowers are engaged in and the value of collateral that borrowers put up to guarantee loans.
Information about borrowers and collateral is thus essential to the flow of credit. But although information is crucial to the efficient operation of credit markets, it is often not itself produced efficiently. In credit markets where information flows are unsteady, private credit institutions may need public assistance or prodding.
This article appeared in the January/February 1993 edition of Business Review.
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